BTP futures volumes exploded on Friday to some 250% of the 10-day average amid a pretty egregious selloff in Italian bonds amid high drama in Rome.
10-year yields jumped more than 25bps and the spread to bunds ballooned, as the market faces the uncomfortable prospect of a budget process clouded by political tumult.
Months of tensions finally boiled over on Thursday, when Matteo Salvini indicated he was prepared to pull the plug on the government once and for all. Prime Minister (for now) Giuseppe Conte struck a defiant tone in the face of Salvini’s power grab, insisting he won’t allow his ascendant deputy to control the timetable.
Here’s the move in BTPs:
Italian bonds surged over the past several months, piggybacking on the global hunt for yield. Anecdotally, that means the selloff has the potential to run pretty far, pretty fast in the event folks stay spooked.
As we noted on Thursday, it’s possible that Salvini’s economic agenda won’t be the worst thing in the world compared to the current setup that has to incorporate Five Star’s expensive electoral promises, but Matteo is notoriously abrasive. Once he’s consolidated power, Brussels will likely have to deal directly with Salvini or his emissaries, with no buffer.
League filed a no confidence motion on Friday and reportedly wants elections on October 13. That’s according to Corriere della Sera, which also says an apolitical “guarantee government” is perhaps the only option that would temporarily “fix” the situation prior to a new vote in November. La Repubblica says President Sergio Mattarella could call a new election for October 23.
“According to the Italian constitution, general elections must be held within 45 and 70 days of the President of the Republic dissolving Parliament [and] logistically, about 60 days are needed to organize such elections”, Barclays noted on Friday.
Salvini wants a debate in Parliament next week, while Luigi Di Maio is angling to push it out towards the end of the month.
The sooner the better for Matteo. There is no one even close in terms of popular support.
Barclays details the rather stark reality. “If general elections were to be held today, League would be able to secure 36.8% of votes [and] along with the right-wing Brother of Italy party, League would be able to win an outright majority in both chambers of Parliament and appoint a right-leaning government”, the bank says.
Clearly, all of this raises questions about the 2020 budget, which is part of the reason markets are spooked and are likely to remain so until there’s more clarity.
Conte continues to insist that Salvini will need to “explain” himself to lawmakers or otherwise give a good reason for his decision to topple the government.
Spoiler alert: No he will not. This is a wrap, and everyone knows it.
As we put it the day after the EU elections, “Italy now belongs to Matteo Salvini“.